Central Banks Have Taken On Fire-Fighting Tasks In This Crisis

In an interview that was published on the German central bank website, the President of the Deutsche Bundesbank Mr. Jens Weidmann answers a series of questions in a short but powerful question/answer format. The interesting thing is that most questions are related to the Euro crisis that has heaten up again driven by Cyprus. We have selected five interesting questions in that respect.

Mr Weidmann, the Bundesbank increased its risk provisioning to €14 billion this week because of the euro crisis. Does that mean you expect the worst is yet to come?

Answer: We have been engaged in a three-year process of building up provisions. These reflect the risks of monetary policy and of central bank crisis measures. The euro crisis is certainly not yet over. Resolving the crisis in lasting fashion will still take quite some time.

Many European politicians are currently pressing for more crisis assistance from the European Central Bank.How great a danger does this constant political pressure pose to your independence?

Answer: This trend towards political influence is not restricted to the euro area. It is a global phenomenon. The central banks have taken on fire-fighting tasks in the crisis and in the process have also blurred the boundary between monetary policy and government fiscal policy. This poses a risk to central bank independence. There is the danger of a loss of confidence in the central banks maintaining their focus on stability.

People ultimately have to ask what danger the euro crisis poses to their savings, do they not?

Answer: We take these concerns very seriously. The interest to be earned on very safe financial investments is currently somewhat lower than the rate of inflation. However, that is not a normal state of affairs, it is a consequence of the crisis. Interest rates will return to normal after the crisis comes to an end. We, as the central bank, continue to have the task of keeping prices stable and thus also ensuring that inflation does not eat away at people’s savings.

Lots of politicians would prefer to alleviate the crisis and the debts by way of higher inflation.

Answer: There are indeed some who see a solution to the crisis in the shape of higher inflation. I would regard such an approach as potentially incendiary. Once you allow inflation, it becomes very difficult to tame. In the short term, our projections show no excessive increase in prices. However, I would caution against underestimating the medium to long-term risks to stability. There must be no doubt that, when the time is right, we will tighten monetary policy.

Your single-minded approach has engendered what almost amounts to a campaign against you outside Germany: it is said you are isolated at the European Central Bank. And US President Barack Obama is even supposed to have asked contemptuously, “Who is this?”. How much has this affected you?

Answer: There is certainly no shame in having the US President respond to my positions. In fact, it demonstrates that our arguments are discussed and the Bundesbank is taken seriously. The euro area is still stuck in a crisis and we are struggling to find the right answers. The Bundesbank advocates a stability-oriented position and regards it as an error to overload monetary policy by expecting it to fulfil too many tasks.

(This interview was brought to our attention by K. Xeroudakis, precious metals strategist)

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